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Oct

VAT as a fiscal stimulus PUBLISHED IN VAT

When the last Government temporarily dropped the standard rate of VAT to its legal minimum, 15%, for a period of 13 months, there were many commentators who chanced their arm on an observation that it would not incentivise further public consumption, nor save businesses, and was little more than a wish to be seen to be doing something for the beleaguered economy in the hope of not appearing impotent. I am happy to say that I was one of those commentators. So, were we Cassandra commentators right or wrong?

 

Well, now we have the result of an officially commissioned research project undertaken by ORC International into the impact of the temporary 15% rate. At the time of writing this Blog I will admit to not having read every single page of the report, but I have read the executive summary which is enough to tell me that, out of the businesses that were included in the research, the general consensus was that the reduced rate had little impact. And this was not because the majority of businesses hung on to the extra revenue rather than dropping their prices to stimulate demand. 78% said that they had passed on the benefit to their customers, and amongst large businesses this rose to 90%. 55% of businesses believed that the reduction had no impact on their customers, and 63% felt it had no impact on their organisation. Presumably the combination of these two meant that they felt that the reduction had not stimulated demand because customers did not perceive it as creating particular extra value for money, and that in turn did not assist the organisations offering the reduction. In fairness, 24% thought that there was some kind of positive impact on customers, but only 16% of the optimists actually believed that it was positive for their organisation. Presumably those organisations took the view that certain customers reaped a short term benefit but did not convert that into extra spending which could benefit businesses.

A small number of respondents actually took the view that the 15% rate was disadvantageous for customers and for organisations. Larger businesses, which inevitably had had greater expenditure in dealing with the rate change, were inclined in the research to emphasise the negative aspects of a commercial nature, although it is hard to believe what the report appears to say (in the executive summary at least) that 28% of larger business said that customers were negatively impacted by the rate change. Clearly, there appears to be a suggestion of a bad taste left by the exercise as a whole.

As mentioned, over 20% of businesses appear not to have reduced their prices to reflect the lower rate and about one third of those felt that their failure to do so made no impact on their businesses. Approximately one third of them simply did not know what impact it had had.

Only 4% of the businesses canvassed said that the VAT reduction had increased profits taken as a whole, although I would be inclined to factor in a reluctance to admit to such profiteering when responding to a survey.

No doubt there is a great deal of detail to analyse, and people will be looking very carefully at sample sizes, selection of samples, and the way in which this research was conducted. But as qualitative research goes, and considering that this kind of research cannot be conducted too long after the event without being degraded, this would appear to be the most likely source of authoritative research on the subject that we will see. And its conclusions show that a small reduction in VAT of the kind that was possible for the last Labour Government is not going to have the impact argued on its behalf by them. It leaves this VAT policy looking more like a political policy than a genuine economic or fiscal one.

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